For Immediate Release
Chicago, IL – August 13, 2014 – Zacks Equity Research highlights Gilead Sciences (GILD-Free Report) as the Bull of the Day and Melco Crown Entertainment (MPEL-Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Banco Santander, S.A. (SAN-Free Report), Barclays PLC (BCS-Free Report) and Deutsche Bank AG (DB-Free Report).
Here is a synopsis of all five stocks:
Bull of the Day:
I last profiled "the new general" of biotechs, Gilead Sciences (GILD-Free Report), in early May after the company delivered an earnings knockout punch to bears who thought a letter from a Congressman lecturing about drug pricing would leave the stock's all-time high near $85 untouched again for a while.
Well that 92% EPS beat was just followed up in Q2 with a 44% beat. Gilead reported GAAP EPS that vaulted over 350% to $2.32 as revenue leapt 136% to $6.53 billion. And sales of that key drug in question, hepatitis C virus (:HCV) treatment Sovaldi, hit $3.48 billion. Analysts expected only $1.61 on $5.86 billion total revenue.
In 2011 when GILD shares were only $20, the company bought Pharmasset for $11 billion to acquire its HCV pipeline. At the time it was considered a huge and risky bet for a company focused on HIV and AIDS treatments.
But since the approval and launch of Sovaldi, the sales ramp has been vertical for a disease affecting 3-4 million Americans and over 150 million worldwide. Trailing 12-month revenues have moved from $11.2 bln in Dec '13 to $17.44 bln at the end of the June quarter.
Bear of the Day:
The Macau gaming scene has seen a slow decline this year due to various factors affecting tourism and the Chinese economy. And this drop was mirrored in the shares of casino stocks like Wynn Resorts, Las Vegas Sands and Melco Crown Entertainment (MPEL-Free Report) which have been in a steady decline of their own since March.
I know because I owned MPEL for a quick 10% trade from $40 to $44 in the first quarter as I followed some institutions who were accumulating shares. And as I watched it lose the 50-day moving average in mid-March, I kept looking for an opportunity to buy again.
Every dip of the falling knife looked tempting, but I realized I didn't know enough about gaming stocks to take that gamble. And caution was the right stance as downward EPS revisions in June caused the stock to slip to a Zacks #4 Rank in July.
Last week, Melco Crown posted disappointing second-quarter 2014 results, missing on both top and bottom lines. Adjusted earnings of 30 cents per share missed the Zacks Consensus Estimate of 37 cents by 18.9%. Further, earnings declined from the year-ago figure of 35 cents by 12.4%. The downside reflects lower-than-expected revenues.
In the quarter, net revenue declined 7.4% year over year to $1.20 billion and also missed the Zacks Consensus Estimate of $2.59 billion by 9.4% due to lower group-wide rolling chip revenues, partially offset by improved mass market table games revenues.
Stress Tests Ahead: 3 EU Banking Picks
Concerns about Europe’s banking sector have intensified following the crisis surrounding Portugal’s banking giant Banco Espírito Santo. Despite the optimism generated by the rescue plan unveiled by the country’s central bank, questions about the industry have come to the fore. In this context, ECB’s decision to conduct a series of exercises before it creates a Eurozone-wide banking watchdog gains special significance.
Banco Espírito’s Rescue Plan
Last week, Portugal's central bank announced a rescue plan for Banco Espírito Santo (:BES). BES had incurred a loss of €3.58 billion in first half of 2014. This is the biggest loss in Portuguese banking history. The central bank announced it will split BES into a “good bank” and a “bad bank.” The ‘good bank’ will receive a bailout of €4.9 billion from the bank resolution fund.
Out of this, €4.4 billion will be provided by the Portuguese government as a loan and the rest as cash. Investors welcomed this plan as it may help Portugal recover from the banking crisis.
The “good bank” will be called Novo Banco. BES’ potential assets such as deposits and loans, which can be repaid, will accrue to the “good bank.” Good bank will use BES’ existing branding and framework to continue its operations.
BES will become the “bad bank.” The “problem” assets of the bank will remain with BES. Shareholders and the creditors will be liable for these assets and may lose all of their investments. The Espírito Santo Financial Group, which is one of the owners of BES, and Crédit Agricole (one of the biggest French lenders) are among those who stand to lose.
ECB’s Asset Review and Stress Tests
The ECB has decided to create a unified watchdog for all Eurozone banks before the end of the year. Ahead of its assumption of formal control on Nov 4 this year, the ECB is carrying out an exhaustive evaluation of the health of banks in the economic union. This includes 128 banks that hold 85% of all banking assets in the 18 countries which use a common currency.
All the 28 members of the EU will also undergo stress tests to determine how they would respond to another economic slowdown and a slump in the markets. In the past, stress tests have performed poorly in achieving their objectives. Both lenders and their supervisors are sceptical about their efficacy since they have upheld the financial soundness of banks which have collapsed shortly afterwards. This includes the likes of Franco-Belgian bank Dexia which failed in 2011.
However, EU officials have emphasized that things will be different this time around. Firstly, banks can no longer depend on their national regulators to protect them from such measures. Secondly, the decision to conduct asset quality reviews ahead of stress tests increases the efficacy of such measures. The wisdom of such an approach has been borne out by their effectiveness in Ireland, Spain and Slovenia in 2011, 2012 and 2013, respectively.
Portugal’s Action In-Line with ECB Approach
Portugal’s approach is in consonance with the ECB’s approach on resolving crises relating to troubled banks. The country has followed Spain’s approach toward such situations by letting shareholders and junior debt holders take losses. This has spared senior creditors and unsecured depositors.
Though such an approach hurts shareholders and creditors, analysts believe that it is good for the banking industry as a whole. It is also in line with EU’s new approach to tackling banking crises. New rules mandate that funds spent on stabilizing distressed banks be recovered from the private sector once the crisis is over. Earlier this month, the EU said the rescue plan for Banco Espírito Santo was in keeping with rules on state-aid.
The approach taken by Portugal’s central bank shows that banks in the EU have taken a more prudent approach to tackling crises. Below we present three stocks from this sector which possess the potential to grow appreciably, each of which also has a good Zacks rank.
Banco Santander, S.A. (SAN-Free Report) is the biggest bank in Spain as well as Latin America. It also operates across four segments: Sovereign, Latin America, UK and Continental Europe. The Bank provides banking services for individuals and companies, leasing, factoring, stockbrokerage and mutual fund services. Its European operations are conducted via Bank Zachodni WBK, Santander Totta and Santander Consumer Bank.
Banco Santander holds a Zacks Rank #2 (Buy) and has expected earnings growth of 14.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.63.
Barclays PLC (BCS-Free Report) is a major global banking and financial services company, with over £1.4 trillion ($2.1 trillion) in assets as of Mar 31, 2014. The company operates through an international network in over 50 countries and regions in Europe, the U.S., Africa and Asia, the company provides a wide range of financial services to individuals, corporations and institutions.
Currently the company holds a Zacks Rank #3 (Hold) and has expected earnings growth of 30.7%. It has a P/E (F1) of 10.13.
Deutsche Bank AG (DB-Free Report) is the largest bank in Germany and one of the largest financial institutions in Europe and the world, as measured by total assets (1,637 billion as of Mar 31, 2014). As of that date, the company had 97,184 full-time employees and operated in 72 countries with 2,853 branches, of which about 66% were in Germany.
Apart from a Zacks Rank #3 (Hold), Deutsche Bank has expected earnings growth of 130.3%. It has a P/E (F1) of 8.76.
The ECB and banking regulators across the region have taken measures to ensure that stability returns to the sector. This is why these stocks would make good additions to your portfolio.
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